Government plans to fast-track degree-awarding powers to new startup institutions as part of its controversial higher education proposals are “a risk too far”, experts in the sector are warning.

Ministers say the legislation, which returns to parliament for further scrutiny next week, will increase competition and choice in the higher education sector, and deliver value for money for students.

But a new report by the Higher Education Policy Institute thinktank says that opening up the sector to so-called “alternative providers” could put the reputation of UK universities at risk if not properly regulated.

The report, published on Thursday, claims that under the legislation, more than two-thirds of alternative providers would remain outside of the new regulatory system. It also calls for better protection of public money as the number of for-profit providers proliferate.

“Alternative providers are numerous and diverse, with over 700 institutions operating in England alone,” said report co-author, John Fielden. “Designing a regulatory system for both the traditional sector and the newcomers is a bed of nails.”

Moreover he said, while the higher education and research bill – which begins its committee stage in the Lords next Monday – removes some barriers to market entry, “the new high-speed approval system for degree-awarding powers is a risk too far”.

In the past it could take six years for a provider to obtain degree-awarding powers. Under the new legislation, they can be given the same powers from the day they launch for a three-year probationary period, reducing the time it takes to acquire the title of university.

The government faces major cross-party opposition to its proposed changes. Labour, Liberal Democrats and crossbench peers in the House of Lords have joined forces in an attempt to scupper what they believe is an attempt at full-scale “marketisation” of the sector.

The Hepi report also looks at lessons that can be learned from the experience in Australia and the US, where there has been rapid growth in for-profit institutions. Co-author Robin Middlehurst says: “Better protection of the public purse is overdue, especially given the growth in the number of for-profit providers. [Ninety-five per cent of new entrants to the market in the past five years have been for-profit providers, the report notes.]

“Experience in the US and Australia shows overly generous rules for alternative providers are a magnet for questionable business practices. The end results can include stranded students, a bill for taxpayers and regulatory intervention.”

The University College Union (UCU), which represents further and higher education staff, said the Hepi report should sound alarm bells in government. The UCU general secretary, Sally Hunt, said: “We cannot afford to ignore the lessons from the US where the for-profit higher education sector has unravelled, taking billions in taxpayers’ money but failing the majority of its students.

“If we are to protect our students and the global reputation enjoyed by UK universities, the new legislation must protect taxpayers’ money from being handed over to a potential pool of unscrupulous providers.

“We must have more rigorous quality measures applied before any new provider is allowed to access either degree-awarding powers or state funding via the student loans system.”

Nick Hillman, the director of Hepi, added: “All higher education institutions were new entrants once, and many alternative providers are providing flexible and innovative provision to underrepresented groups.

“But, as the higher education market continues to change shape, we must be vigilant in ensuring bad apples do not contaminate the sector as a whole.”